Gatsby, Galbraith and the Myth of Coolidge’s Crash

Feb. 27 (Bloomberg) -- What’s next after the Oscars? More
Gatsby, of course. “The Great Gatsby,” featuring Leonardo
DiCaprio and coming in May, will be the fourth, or by some
counts the fifth or sixth, movie version of F. Scott
Fitzgerald’s novel about the illusion created by false wealth in
the 1920s.

The corollary to the “The Great Gatsby” in the literature
of economics is another old “great,” “The Great Crash 1929,” by
the economist John Kenneth Galbraith. Galbraith’s narrative,
like Fitzgerald’s, is subtle, conjuring complex characters. Yet
the effect of both books is the same: to display the 1920s as a
decade full of false numbers and false people, reckless pilots
who caused an economic wreck so catastrophic it necessitated 10
years of Depression.

And Galbraith assigns the pivotal role of the heedless
Daisy Buchanan to Calvin Coolidge, the 30th U.S. president:
“President Coolidge neither knew nor cared what was going on,”
Galbraith writes. In other words, the 30th president was the one
to fall asleep at the wheel of our economic car.

Since Galbraith published “Crash” in 1954, a series of
scholarly works have shown this line of reasoning to be about as
substantial as a champagne bubble. As early as the 1960s, for
example, Milton Friedman and Anna Schwartz posited that monetary
policy was the crucial force in the Great Depression. Their “A
Monetary History of the United States, 1867-1960” mentions
Coolidge precisely once, in a footnote.

Bubbly Market

Yet like the movie “Gatsby,” the Coolidge Stock Crash myth
always comes back in a new version, airing without reference to
previous discussion. Reviews of my new book about Coolidge have
drawn the Gatsby analogy.

Some see another drama. It is true that Coolidge served as
president from 1923 to 1929, leaving office just seven months
before Black Tuesday. It is also true that the stock market rose
alarmingly during his presidency, going from the level of 80 or
so to a genuinely bubbly 310 when Coolidge left office. But
there was no bubble in the rest of the economy and no huge price
rises. Growth was strong, unemployment was low, productivity
gains were admirable, and real wages grew.

And it wasn’t as if Coolidge didn’t know or care about the
stock-market jump. After all, Coolidge, a man so cautious that
even as the governor of Massachusetts he had chosen to rent
rather than take a mortgage on a house, well recalled the seven
previous drops, some extreme, in the Dow Jones Industrial
Average of his adulthood. As stock prices rose, the president
consulted the Treasury as well as an expert in financial
governance named William Z. Ripley and Charles Merrill, co-founder of Merrill Lynch & Co.

In April 1928, for example, Coolidge instructed his banker
in Northampton, Massachusetts, to sell 150 shares of Anaconda
Copper that he had bought as far back as 1918. (Coolidge didn’t
profit much: The stock went for 69 3/8, and he had bought it for
63 1/4.) In March 1928, the president sold stock in U.S. Steel,
a company that was a kind of proxy for the business cycle,
though he had held it for a decade. He also liquidated some
Liberty bonds.

Privately, Coolidge counted on a crash and predicted the
political consequences of such an event in conversation with his
Secret Service man, Edmund Starling. “Well, they’re going to
elect that Superman Hoover, and he’s going to have some trouble.
He’s going to have to spend money, but it won’t be enough. Then
the Democrats will come in. But they don’t know anything about
money.”

What Galbraith and others take for Coolidge laziness was
actually Coolidge restraint. Coolidge didn’t deem it appropriate
for the federal government to intervene in the stock market.
After all, in those days, there was no Securities and Exchange
Commission; states regulated markets.

Fed’s Fault

Policy at the Federal Reserve was not set by Coolidge but
by the Fed and, to some extent, his mighty Treasury secretary,
Andrew Mellon, whose autonomy Coolidge respected. Coolidge
thought, too, that there was an issue of moral hazard: If the
market crashed, buyers would learn from the agony not to buy on
margin next time.

In his off-the-record press conferences, Coolidge told
reporters repeatedly that market questions ought to be left to
“the judgment and discretion of commissions and various states.”
When it came to the question of brokers’ loans, Coolidge was
once again explicit, saying to Henry Parker Willis, a
journalist, that “if I were to give my own personal opinion
about it, I should say that any loan made for gambling in stocks
was an ‘excessive loan.’”

Galbraith and others are eager to isolate “gotcha”
statements by Coolidge that misled the market. In his effort to
appear neutral, Coolidge did from time to time supply bland
lines that could be misinterpreted as bullish, and were. But the
most egregious of the statements attributed to Coolidge,
including one saying that late 1920s markets were “absolutely
sound,” came from President Herbert Hoover, who resented
Coolidge. And scouring Coolidge’s unpublished off-the-record
news conferences, I didn’t find Coolidge boosting stocks
aggressively.

Setting the crash aside, can one assign Coolidge any blame
for the Great Depression? Some, especially when it came to
tariffs, which Coolidge’s Republican Party supported.

But the greater culprits are Coolidge’s successors, Hoover,
a more progressive Republican, and Democrat Franklin D.
Roosevelt. Hoover raised taxes, signed the Smoot-Hawley Tariff
Act and strong-armed businesses into wage increases they could
ill afford. In addition, Hoover sent a general signal of
government activism, which chilled markets. Roosevelt
exacerbated the uncertainty with arbitrary interventions into
policy in all areas.

One can argue that the Coolidge story isn’t that of a
president causing the Depression. It is the story of a president
postponing one. And that story, too, would make a good movie.

(Amity Shlaes, director of the Bush Center Four Percent
Growth Project, is the author of “Coolidge,” published by
HarperCollins, and a Bloomberg View columnist. The opinions
expressed are her own.)